The investing world can be extremely dynamic. Thus, as new investors, you have to learn its basic principle and the differences between asset classes in order to earn a significant gain.
Here is the basic knowledge of major asset classes, in the ascending order of risk.
Cash
The safest and simplest investment asset is a cash bank deposit. This asset gives the investors the precise knowledge of the amount of interest they will gain. Besides, it also guarantees that investors will get their money back.
However, with this asset, investors rarely get the ability to beat inflation.
Bonds
Bonds basically represent a loan made by investors to a borrower. Naturally, the bond will involve a government agency or company.
In this asset class, the borrower issues a fixed interest rate to the lender as the exchange for borrowing their capital. Commonly, organizations use this bond to finance their operations, make a purchase or other projects.
Stocks
By purchasing shares of stocks from a company, investors participate in the company’s success through the increasing stock prices or dividends. Being a shareholder means that the investors also have a claim on the company’s assets during the liquidation.
If an investor is the holders of common stock, then he or she has a voting right during the shareholders’ meetings. On the other hand, if he or she owns preferred stock, then he or she does not own the voting right, but get the dividend payment, instead.
Mutual Fund
In this fund, we have more than one investor to create a pool of money together and use it to purchase securities. It is not passive, as they manage by portfolio managers. These people are in charge to allocate and distribute the capital into bonds, stocks, and other securities.
To participate in this mutual fund, investors can invest as little as $ 1,000 per share. In this type of investment, investors are given the benefits of diversification.
This investment is valued at the end of the trading day. Meanwhile, all the sell and buy transactions occur after the market closes.
Exchange-Traded Funds (ETF)
Exchange-traded funds are similar to mutual funds. Yet, this investment makes the transaction during the day on the stock exchange. That way, it mirrors the buy and sells behavior of the stocks. Thus, its value can also drastically change during the trading day.
Besides these assets, you need to also understand the vast universe of alternative investment, that you can read here.
